Breakdown of Harvard Business Publishing

If you have been to a business school or are just interested in business in general, it’ll be hard not to know about Harvard Business Publishing (HBP). Operating under Harvard Business School, the publishing arm is a well-known established name that offers great content, whether it’s case studies, articles or books on business lessons. Yet, very little has been talked about its unit economics and scale. In fact, nobody has spoken officially about HBP on record. Hence, I was really fascinated by Business Breakdowns’ episode on HBP.

HBP has a long history. Starting well over 100 years ago, the unit has evolved to being more than just a publisher of books. Today, it has four major business lines: case studies, advertising, print & digital subscriptions, and books. Together, these business lines generate $270 million in annual revenue with 40% from international markets, up from around $100 millions in the early 2000s. In terms of distribution, below is the estimated breakdown of HBP’s annual revenue

  • Subscription business: $35 million
  • Case studies: $80 – 100 million
  • Books: $27 – 54 million
  • Advertising: $90 – $130 million

HBP has great bargaining power as a seller and a buyer. From the supply standpoint, HBP has an unsurprising source of content. Harvard faculty members must contribute to the library of case studies to maintain tenure. Harvard is reportedly paying little for these case studies, yet making somewhere between $80 million to $100 million per year. These case studies from Harvard professors only make up 20% of what HBO has to offer. The other 80% are penned by professors from other places who are likely not better compensated than their Harvard counterparts. Even though we won’t find individual authors’ names on case studies, being able to show your work with a stamp of approval from Harvard means something.

On the other hand, HBP has no problems selling these case studies to business schools and companies. Universities love to add a flair of reality and pragmatism to theory by using real case studies. HBP carries a certain weight of authority and swagger in the academic world. Case studies are used semester after semester and they don’t need to be rewritten every year. In fact, my personal experience at a US university is that professors don’t like to change their curriculum every year either. As a result, HBP gets a sweet deal for them: pay little for a case study and milk revenue out of it every semester from every school that wishes to use it. The same goes for companies. If they want to train their managers and executives, what’s better than HBP case studies?

This goes to show what I think is the best asset of HBP: its brand. The brand draws readers to the materials that the publishing arm puts out and professors to create content for them. It makes everything tick.

While HBP’s achievements are admirable, there are two things that irk me. First, HBP can force professors, especially those employed at Harvard itself, to write case studies for them to avoid losing tenure and make a lot of money out of it while allegedly paying little for it. It would be a different matter if these professors weren’t under employment contract and voluntarily wrote for HBP knowing all the conditions. But since they already put in the work to keep the level of education worthy of the name Harvard, why can’t they be paid commensurately to what HBP earns on those case studies?

Second, a lot of HBP’s revenue is tax exempted. The speaker said that while HBP has to pay taxes on their advertising revenue, they don’t need to do so for the rest. I mean, Harvard charges arms and legs on tuition fees and has an enormous endowment fund of, wait for it, $53 billion as of June 2021. Do they really need tax breaks as much as small businesses that don’t even earn a fraction of what they do? I am not arguing that they can’t sell materials to other schools or whoever wants to read them. But there should not be any tax exemption on that revenue stream. That’s just absurd.

In short, I like this episode of Business Breakdowns as it sheds light on a business that few talk about. Have a listen if you are interested.

PayPal has a monetization problem with Venmo

The past three years has seen a breathtaking growth of Venmo. The number of active accounts grew from 40 million in Q1 2019 to 90 million in Q2 2022. Its Transaction Processing Volume (TPV) almost tripled in the same period of time, reaching $61 billion in Q2 2022. However, growth has been hard to come by in the last two quarters, especially in Q3 2022. TPV growth was only single digit in the last two earnings reports. The number of active accounts plateaued at 90 million. Available only in the US, where there are about 230 million consumers, one has to wonder how much room there is for Venmo to continue to expand domestically.

Venmo TPV and Active Accounts
Venmo TPV and Active Accounts

Going overseas sounds like a straightforward answer, but operationally, it is anything but. It would require a lot of investments in localizing the product, marketing to acquire customers, customer management to maintain engagement and compliance to stay on the good side of lawmakers. There must be a reason why PayPal hasn’t taken Venmo outside of the US. Given the missteps that the management has taken over the last few years, it’s not impossible that restricting Venmo to the US is a mistake. Personally; however, I can see why they haven’t.

If growth in TPV and user base slows down, what about monetization? PayPal reported that Venmo earned $250 million in revenue in Q4 FY2021 and $900 million in FY2021. Since Venmo processed almost $61 billion and $230 billion in TPV in the same periods respectively, Venmo’s take rate is about 0.4%. To put that take rate into context, let’s compare it to Cash App

VenmoCash AppNote
Monthly Active Accounts (in million)5749the Cash App number is the number of transacting accounts in September 2022
Transaction Volume (in $ billion) in the quarter ending Sep 30th, 2022644.3
Revenue (in $ million) in the quarter ending Sep 30th, 2022270118Venmo’s revenue is my estimate based on the $250-million figure reported for Q4 2021 while Cash App’s revenue only includes transaction-based revenue

The comparison shows that Venmo is seriously under-monetized compared to Cash App. PayPal has a valuable asset in Venmo that resonates with a lot of consumers in America, especially the younger crowd, but they don’t seem to be able to benefit from said asset. And don’t take my word on it as the CEO of PayPal is not entirely happy either

I am pleased with Venmo’s progress but I am not thrilled with all the progress that we’ve had. I just want to be up front with that. I feel like we can do a lot more with that asset than we have been able to do so far. There is a ton of potential there. The people who use Venmo, our customers love Venmo. It is a beloved brand. They use it all the time. You can tell from our monthly active users [of 57M]. The monthly active users are up by ~85% in the last 2 years or so. So, a lot of progress there. But I feel like there can be more progress.

These are some big merchants that are implementing Pay with Venmo and I think we will see more. We are going to revamp the card strategy, we started to begin to do that. We think that is one place that Cash App has done particularly well on, and there is no reason why we should not with our scale and size be able to really tap into a revamped card functionality. Over time, we will also begin to see more basic financial services there, savings and other things come into the Venmo wallet. There is focus on things that have to get done right now. Amazon and Apple are big opportunities, we want to make sure we take full advantage of those. We’ve got some basic hygiene work to do there. Good progress, but I wouldn’t call it great progress right now. In terms of revenue growth, we had anticipated that we would be about 50% revenue growth [for FY’22] and that is where we are year to date. Q4, like the rest of the business, is going to be weaker than we expected. That will probably take Venmo revenue growth into the 40%’s [year over year growth for FY’22]. That is probably a good place for you to assume it will end

Source: PayPal Third Quarter 2022 Buyside Call

Platforms like Venmo and Cash App monetize by charging sellers on every transaction and the majority of retail sales still takes place in stores. To facilitate in-store transactions, cards are the most successful medium. PayPal put a lot of efforts into QR Code during the pandemic, but they abandoned that push and have since switched focus to cards. Venmo credit card doesn’t require a Venmo balance, but it’s not available to every consumer, especially Gen Z users whose lack of credit history prevents them from qualifying for a credit card. I wouldn’t be surprised if Venmo credit card users constituted only a small percentage of Venmo active base.

While accessible to many more people, Venmo debit card requires a Venmo balance. The question then becomes: how can Venmo get users to park money on a Venmo account? Users only maintain a balance when there is enough utility, whether it’s rewards or accessibility at a variety of merchants. Cash App has been successful so far in this regard. Cash App reported that it had $2 billion of direct deposits in September 2022. Paper direct deposits into Cash App which was launched nearly a year ago cumulatively crossed $3.5 billion. These figures indicate how much Cash App users value the platform and how much they want to use it. This is something that Venmo has to, at least, replicate and there certainly is work to be done.

Cash App users can paper-deposit funds into their accounts at some retail stores, but Venmo doesn’t have this feature. Checks deposited electronically into Cash App will be available on the platform the next business day at no additional cost. With Venmo, users may have to wait up to 10 days to receive funds from an electronic check unless users pay a small fee to expedite the process. Any additional friction to the deposit process will deter users from bringing cash to the platform, so obviously I’d love to see Venmo at least get feature parity with Cash App.

Moreover, Venmo also needs to be available at more checkout pages. The partnership with Amazon which enables customers to add their Venmo account as a payment method will likely boost the perceived utility of Venmo. But there should be more partnerships like that. PayPal powers payments for some of the largest merchants in the US, whether it’s the branded PayPal or the unbranded platform Braintree. They should look into leveraging such an advantage to make Venmo more prominent. If a user could pay for Uber, Amazon or Instacart with their Venmo balance, that would obviously make Venmo more useful and appealing.

There is also a side benefit from having more customer funds. The more funds the likes of Venmo or Block have, the more interest income they can earn. In Q3 2022, PayPal’s Other Value Added Services revenue increased by $37 million year over year. One of the main drivers of such an increase was higher interest income on customer funds due to higher interest rates. Block itself made $7 million in revenue from customer funds as well.

Next, rewards is a great tool to keep consumers engaged. Consumers love to earn rewards and redeem them for other purchases. PayPal recently revamped their rewards program that unifies all PayPal products and offers consumers more ways to earn and redeem. However, since Venmo and PayPal are still two independent platforms, the new PayPal Rewards does not feature Venmo. If consumers are expected to use Venmo for payments, they will expect to be rewarded for such loyalty. Besides Venmo credit card’s rewards, Venmo offers cash back at qualifying merchants on Venmo debit card, but information on that is scant. Venmo needs to make the program more attractive and prominent. Yes, the low interchange rate on debit card transactions makes it expensive to fund rewards, but it’s also expensive, if not more, to acquire new customers and fend off Cash App and a host of other competitors.

Here are a couple of things that Venmo can do. First, link the credit card with the debit card, Any credit card rewards can be turned to cash on Venmo account that can be used to pay friends or purchase at stores with the Venmo Debit Card. This concept is not something new. It’s similar to what Apple has with Apple Card and Apple Cash. By making the credit card rewards immediately available, Venmo would give users a reason to use the Venmo app and debit card.

Second, because Venmo Credit Card is a co-branded card issued by Synchrony, Venmo must receive some compensation, either as share of interest and/or interchange income and finder’s fee for every new account. Financial reports by PayPal indicate that the compensation could run in the millions. Use that money to run marketing campaigns with a celebrity. I’d love to see Venmo try to do what Capital One did with Taylor Swift. Capital One generated a lot of accounts, interest and awareness with this campaign.

In short, Venmo is an incredible asset that PayPal has at its disposal. Investors place a premium on the company’s ability to monetize Venmo, but even the CEO is not happy with what they have done. Compared to Cash App, it’s under-monetized. PayPal needs to start making more progress soon because their competitors don’t stand still for them to catch up.

With this credit card, you can earn more than $500 in the first year

US Bank recently announced a new exciting addition to their personal credit card line-up and it’s called US Bank Shopper Cash Rewards Visa Signature Credit Card. Here is what you will get with this card:

  • $250 bonus after spending $2,000 or more within the first 120 days of account opening
  • 6% cash back on your first $1,500 in combined eligible purchases each quarter with two retailers you choose. Every quarter, you’ll have to opt in and choose two retailers, up to 5 days before the quarter ends
  • 3% cash back on on your first $1,500 in eligible purchases on your choice of one everyday category (like wholesale clubs, gas and EV charging stations, bills and utilities)
  • 1.5% cash back on all other purchases. In the event that your spend exceeds the $1,500 threshold at the chosen retailers and accelerator categories above, any additional spend will earn $1.5%
  • $95 in annual fee with the first year’s fee waived
  • Ability to use Real-Time Rewards, which allows cardholders to turn purchases into rewards and redeem rewards on purchases in real time
  • Ability to use US Bank Extend Pay, which is the bank’s Buy Now Pay Later feature, for a monthly fee of around 1.6% of the balance
The list of eligible retailers. Source: US Bank

From a cardholder perspective, this is a seriously good card. The list of eligible retailers is impressive, featuring the most popular stores for the majority of people in America. For the sake of simplicity, let’s talk about what I think will be the most common scenario: groceries at Walmart. Spending $500 a month on groceries at Walmart is common for a family of four people. If a household’s children are all adults and everybody shares one card, it will be even easier to clear the threshold. At 6% cash back, cardholders can get back $90 on $1,500 spend every quarter or $360 every year. Even if you are a single user and spend around $1,000 on groceries at Walmart, it will still result in $240 in annual cash back. Either way, the rewards easily clear the annual fee of $95.

In addition, if you spend $200 on bills & utilities and $100 on gas every month, you can get back $9 a month or $108 a year in cash back. I drive a sedan and don’t rack up mileage, so I spend like $40/month on gas. But to truck drivers or SUV owners, this card presents a great saving opportunity. In short, with all the rewards combined with the $250 bonus offer, a cardholder can earn at least $500 in the first year with this credit card.

From a perspective of somebody who works in the credit card industry, I am excited about this new product and I would love to know how US Bank could make money from it. Let me explain. The 6% cash back category is surely a money loser for the issuer because there is no consumer interchange rate that exceeds even 3.5%. The magnitude of the loss depends on which merchants cardholders pick. Amazon and Walmart typically have an interchange rate of 0.7%, meaning that US Bank would lose $5.3 in rewards on every $100 transaction. Other retailers have high interchange rates, but they will be around 2-2.5% at the most. While EV Charging has an interchange rate of 3%+, meaning that US Bank will break even or generate some marginal revenue on this category, wholesale clubs, gas and utilities are all low-interchange categories. All other purchases that earn 1.5% in rewards should have, on average, negligible net revenue/loss for US Bank. Throw in the one-time $250 bonus offer and you can see why US Bank will definitely lose money on rewards.

The issuer hopes to negate some of the impact with the annual fee of $95, but like I explained above, it will not cover all the rewards if customers are savvy enough. The real driver of revenue and profit for US Bank will be the interest income on APR of up to 28.24%. In the credit card industry, we use the term “Transactors” to describe consumers that pay off their balance regularly and do not revolve. US Bank will get no luck from them. I suspect that the bank will try to acquire as many non-Transactors as possible, hoping that cardholders will appreciate the benefits and spend more than they can afford. To this end, there are three factors that will determine the success of this credit card:

  • Keep cardholders from churning before the first annual comes up. There will be a lot of gamers who sign up for rewards and bonus before leaving to avoid having to cough up $95 in annual fee
  • Educate cardholders on the benefits and how they can have a net gain despite the annual fee. That’s why there is a rewards calculator embedded on US Bank’s product page. But they should do more. Use influencers. Make the use of this credit card as relevant as possible to an average Joe. Explain to them why they should pay an annual fee to get this card instead of other cards with 5% cash back and no annual fee
  • Control charge-off

I already saw online comments saying that the $95 annual fee was a dealbreaker. I totally understand the sentiment, but from an issuer perspective, the annual fee is what brings this card from “impossible to make money” to “having a chance of profitability”. As a consumer, I probably won’t sign up for this card any time soon as I don’t have a big-item purchase lined up and because my spending profile will not benefit me. As somebody who works in the credit card industry, I am excited to see what unfolds next for this product. I haven’t seen anything like it on the market for a while. It’s refreshing and definitely gives us some thoughts on how to construct our portfolio.

Apple Earnings – The Resilience & Effectiveness Of Apple

Last Thursday, Apple announced its Q4 FY2022 earnings results as follows

  • Revenue: $90.15 bn vs $88.9 bn estimated. Up 8% year over year (YoY)
  • Gross Margin: 42.3% vs 42.1% estimated. Essentially flat YoY
  • iPhone revenue: $42.63 bn vs $43.21 bn estimated. Up 9.7% YoY
  • Mac revenue: $11.51 bn vs $9.36 bn estimated . Up 25.4% YoY
  • iPad revenue: $7.17 bn vs $7.94 bn estimated. Down 13.6% YoY
  • Other Products revenue: $9.65 bn vs $9.17 bn estimated. Up 9.9% YoY
  • Services revenue: $19.19 bn vs $20.1 bn estimated. Up 5% YoY
  • EPS$1.29 vs. $1.27 estimated

On the surface, it looks like a routinely great quarter for Apple, but there are a few points worth calling out.

Apple's revenue growth
Figure 1 – Apple’s revenue growth

First, Apple got hit with a 600 basis point of unfavorable foreign exchange impact due to the strength of the dollar. Had the currency exchange stayed constant, Apple’s revenue growth would likely have been two-digits and could have gone up to as much as 14%. Despite significant foreign exchange headwinds, product margin was 35%, flat compared to Q3 FY2022, and 100 basis point up year over year. This indicates Apple managed to gain efficiency and sell more expensive products. To investors who care about how a company is run, this is a good sign.

Second, the stickiness of iPhone. Since Q4 FY2020, iPhone revenue has increased year over year every quarter. In FY2022, iPhone revenue grew by 7%, on top of the monstrous 39% growth achieved in FY2021. As a billion business worth more than $200 billion, that’s no mean feat. More impressively, the numbers could have been even rosier. According to Tim Cook, the company has been facing and still faces supply chain constraints for the popular iPhone 14, iPhone 14 Pro and iPhone 14 Pro Max. Had Apple had enough parts to meet the demand, they could have added a couple of more billions to their top line. In the time of unprecedented inflation and uncertain macro-economic conditions, this shows how much consumers love their iPhone and considers it more of a necessity than a luxury.

Apple business segments' revenue growth
Figure 2 – Apple business segments’ revenue growth

Next, Services grew 5% YoY and slightly missed analysts’ expectation. Adding the estimated foreign exchange impact of 600 basis points, Services would have grown by 11%, beating the consensus. Since 2018, Services has grown by double digits every year, reaching $78.1 billion in annual revenue in FY2022, up from almost $40 billion in 2018. Compared to previous year, FY2022 posed a lower annual growth, but there are levers that Apple can pull:

  • Apple recently announced price hikes on Apple Music, Apple TV+ & Apple One. The company explained that the price increase for Apple Music is due to more payouts to artists while that for Apple TV+ is fair considering the amount of content that Apple has added since the launch of the streaming service. As the flagship overarching subscription, of course, Apple One will also be more expensive. I think the justification makes sense because if Apple REALLY wanted to increase Services revenue and abuse its power, the company would raise iCloud’s prices. There are alternatives to Apple Music and TV+, but there is nothing to replace iCloud and no Apple user I know doesn’t buy additional storage. In short, this is not a move out of desperation.
  • Apple is loading more ads on the App Store. In their 2022 annual report, the company already cited advertising as one of the main drivers behind Services’ growth. Ads revenue is great and all, but too many ads will harm the user experience. Plus, there is already backlash from developers who saw online gaming ads placed next to their apps. Hence, Apple needs to be careful and considerate about pushing their advertising division
  • Apple Business Essentials. There has been no disclosure from Apple regarding this service, but I suspect it will come to the fold more in the next couple of years

Last but not least, I am really pleased with how Apple manages its costs. The gross margin profile of Products, Services and the whole company have been very stable in the last four years, despite Covid-19, the war in Ukraine, the withdrawal from Russia, the supply chain challenges and other macro-economic events. Operating expenses, including R&D and SG&A, as % of total revenue never exceeded 8% in the last four years. Based on the commentary from the executives, that should be the case for the next twelve months:

When we look at our capex, as you correctly said, I mean, we’ve been fairly stable, and I think our capital intensity is really very good. We have three major buckets in capex for the company. We have certain dedicated tools for the manufacturing facilities. We had some spend around data centers, and we have spent around our office facilities around the world. We obviously monitor all of them. There is nothing unusual that we see for the next 12 months.

When a company reaches a trillion dollar mark in valuation and generates billions of dollars in cash flow every 90 days, there is understandably a risk of being negligent on cost control. Think about yourself. Do you allow yourself more luxuries and impulsive purchases now than you did as a student and when you had lower income? From this perspective, Apple has been a disciplined and prudent steward of shareholder capital. To some extent, I don’t think you can make the same point about other big techs, such as Amazon or Facebook.

Apple's gross margin
Figure 3 – Apple’s gross margin

In short, this quarter’s results were not the most impressive that Apple has ever put out. They were just routinely and boringly good from my perspective and for the reasons I listed above. Even though there is no headline-grabbing debate-fueling stuff such as the investment in Reality Labs by Facebook, I prefer a stable and effective management that keeps their feet on the ground and produces results for shareholders.

Uber plans to advertise to riders based on destination data

Uber users, get ready to see more ads!

This week, Uber announced the formation of its advertising division and a few new ads formats. Per Uber:

With the addition of Journey Ads, Uber has created an engaging model that enables brands to share strategic campaigns across Uber’s mobility and delivery businesses, while connecting with consumers in brand-safe and captivating ways. Journey Ads place relevant brand content and offers in front of purchase-minded audiences as they transact throughout their journey – while waiting for their driver and during their trip

  • Journey Ads that capture consumers’ attention during their trip with ad units that drive purchases and brand awareness as they move with purpose.
  • Prominently placed Sponsored Listings across Uber Eats to get brands ahead of the competition and capture the attention of ready-to-purchase consumers, with clients such as Shake Shack already seeing increased engagement, ROI and customer acquisition.
  • Sponsored Emails that enable brands to promote exclusive offers to Uber and Uber Eats consumers through email delivery directly into their inboxes.
  • Homepage Billboards that give brands the ability to prominently display messaging on the homepage of Uber Eats, the world’s most-downloaded food delivery app.
  • Post-checkout Ads which allow brands to promote to purchase-minded consumers as they await updates on their order.
  • Storefront Ads where CPG brands can enjoy prominent placement of their products at the top of a digital storefront. PepsiCo has been a pilot partner of storefront ad offerings.
  • In Menu Ads that enable restaurants to feature their seasonal or specially priced menu item to entice consumers to take advantage of the promotional offer. Chipotle has been a pilot partner on this effort.
  • Highly visible digital out-of-home Car Top Ads whichenable brands to reach consumers based on location and time of day across top U.S. cities.
  • Tablet Advertising pilot which will see strategic partners pilot in-car tablets in LA and S

Uber has one of the richest data on consumers on the market. It knows when, where and how often consumers go as well as what they order for food, from where and the frequency. Which other company can make the same boast? Uber also stores your payment details; which is important to run ads optimized for conversions. Facebook would kill to have your payment details stored on their platform! In addition, the company is one of the most recognized consumer brands. Therefore, it’s natural that Uber decides to invest in leveraging this rich asset, especially given the high margin of advertising and the premium that investors put on profitability these days.

23% of Uber Delivery merchants are already active advertisers on the platform. I am sure many of them will be interested in, at least, learning what the new ads types such as In-Menu Ads, Storefront Ads or Homepage Billboards can do for their business. On the Mobility side, Uber wasn’t able to monetize ads before. While this week’s announcement is a sensible inevitable step, I have doubt over how effective advertising will be on Uber rides. Let me explain.

Uber Eats users often take time to research what food to order and where to order it on the platform. During that process, they pay attention to what is on their screen and are more likely to interact if a relevant ads shows up. For instance, if someone is looking for Vietnamese food for dinner tonight and a local Vietnamese diner runs a promotion, of course they will be more likely to explore what the promotion is about. The intention to purchase is established.

The user experience is; however, very different on the Mobility side. When a user wants to order a ride, they open the Uber app, type in an address or choose a bookmarked destination, wait for the screen to load, connect to a driver, book a trip, leave the app to do something else, meet the driver, get to the destination and leave the car. It’s rare that a user will look for a destination on Uber. That’s not how people use it. Hence, there will be no spare time or attention during the booking process. The intention to buy is not as established as it is on the Delivery side. Consequently, ads will be ignored more often.

That’s not to say ads broadcast during trips has no potential. Leveraging geolocation data for real-time ads is a gold mine. For instance, if somebody is in an Uber car to a big shopping mall, retailers at that mall can and should run sponsored promotions to target that person. The question is in what format. I’d argue that a notification on the phone or in-car tablet ads would be the most effective. Imagine that you are going to Times Square and Macy’s blasts a 30% off promotion on a tablet attached to the back of the driver or passenger seat upfront or in a notification on your phone, chances are that you’d interact with the ads. The possibilities are truly endless in this scenario.

To realize the potential of their advertising business, Uber has a lot of work to do. First, there is a huge privacy concern. People do not feel comfortable that their trips to sensitive places like hospitals or abortion clinics are used for targeting ads. Uber already forbids ads targeting based on certain types of destinations, but will users trust the company and take them on their words? That brings us to the second issue: Uber’s image as a brand that consumers can trust. Credit to Dara and his team that since he took over, Uber’s image has been much better-received than it was under the original founder. With that being said, Uber has a long way to go to achieve the level of trust that the likes of Amazon or Apple have. It doesn’t help the cause when the company had missteps in handling users’ data before, the most recent of which was a hack by an 18-year-old. Last but not least, how would Uber ensure an enjoyable experience on their app with an increase in ads load? Nobody likes being shoved ads in the face. Uber has every incentive to lengthen the wait time and put ads in front of eyeballs. But at what cost? Numerous competitors are more than happy to take users away from Uber due to privacy concern and a compromised user experience.

Uber’s latest development is a sensible business move. There is plenty of potential to unlock, but nothing worth having comes without risks. This move is no exception. Uber has the ingredients in place, but whether they can bring everything together is a true test for Dara and his team.

This week’s Formula 1 Grand Prix in Texas saw McLaren introduce on-demand digital ads on their two cars. Imagine if Uber could do this on their fleet, show ads on-demand and share revenue with drivers. That would benefit both the company and its carriers. We are a long way from that vision, but it’s not impossible.

Another Superpower of Apple – Pricing Strategy

You’ll be hard-pressed to find a market in which customer preference is homogeneous. People and companies have different wants and needs. Such ​heterogeneity is a powerful force driving a company’s product and pricing strategy. A “one-size-fits-all” approach is bound to fail, but on the other hand, it’s exceedingly difficult to get the right product to market at the right price. Price a product too low and a business will leave money on the table. Price it too high and competitors will swoop in to take market share. Successful businesses are those that manage to meet diverse customer needs with different products at varied price points. Apple is among the best in the world at that.

Believe it or not, Apple has a complex portfolio of products. Every model has multiple configurations sold at different prices. For the sake of simplicity, I catalogued only the lowest price point of each model of five major product lines: iPhone, Mac, iPad, Apple Watch and AirPods. Furthermore, I included only the current models that Apple sells on its official store at and excluded all the refurbished versions. Here is what the pricing schemes look like:

Apple's Pricing Schemes For Major Products
Figure 1 – Apple’s Pricing Schemes For Major Products

Obviously, Apple doesn’t adopt the one-size-fits-all approach. Every product line has several variations. There is an entry-level option that satisfies the basic needs of customers who do not wish to splurge a big amount on a gadget. Take iPhone SE as an example. It has Touch ID instead of the more trendy Face ID as an authentication feature. It comes with Bionic A15 instead of the latest A16 chip. There are several other compromises, but compared to iPhone 5 or even 6 a few years ago, I bet the current SE is still a much better phone. Since the iPhone SE features must already satisfy the needs of low spenders, why would Apple need to add more unwanted features and price itself out of this customer segment?

On the other side of the spectrum, the most sophisticated users have niche preferences and are willing to pay for products that can deliver accordingly. Mac Pro is a too powerful and too expensive computer if you just want to use it for Web surfing and Office 365. However, it would be a great choice for those who need a lot of computing power for their professions. Apple Watch Ultra costs more than a Mac Mini. It’s too expensive for someone like me who just wants a smartwatch for daily exercises. But for fans of extreme sports, it’s the perfect companion.

In addition, Apple has offers to the “middle class” segment that has a bit more sophisticated needs yet does not wish to pay a lot. Like myself. This pricing strategy enables Apple to appeal to more customer segments and sells more hardware. To them, the most challenging task is to get a customer to join the ecosystem. Once someone gets in, chances are that they will stay for a long time and be primed for Apple to monetize through a myriad of services.

There is also an “anchor pricing” effect stemming from having different tiers. The point is to make your main product stand out by offering lesser alternatives. Let me explain. With $599, users can have a brand new iPhone 12 with the A14 chip. However, they will be tempted to think: if I pay just $100 more, I can have a more powerful chip (A15), theoretically a couple of more hours of battery and some camera features that I may use once in a while. Some may take it further and ponder that because iPhone 14 is $100 more expensive than iPhone 13 yet it has one more GPU, Emergency SOS via satellites, crash detection and several more camera features, is it worth to go all the way? This anchoring effect is even more obvious between iPhone 14 and the Pro versions. The gap between iPhone 14 and iPhone 14 Pro is $200, but the latter has a more advanced chip (A16), a better camera and some software features that Apple really pushes such as always-on display, Dynamic Island & Promotion Technology. I can see why users will be tempted to shell out more money for the Pro versions. In fact, there is already report on high demand for iPhone 14 Pro. I think Apple will continue to use this anchor pricing effect and bring their best updates to the Pro lineup in the future. This way, they can get a higher share of consumer wallet and maximize their top and bottom line.

But such an elaborate pricing strategy doesn’t come cheap. It requires a lot of collaboration, planning and smooth operation from the internal teams. Think of the work that the supply chain team must do to secure the needed parts. Or the planning and execution that the engineering team has to offer so that all products work as intended and carry the right appeal. I bet it’s also very challenging for the revenue management folks at Apple to analyze data and make forecasts. But hey, nothing worth having comes easy, right?

Admittedly, I don’t have any sales data on specific products. However, Apple has seen an increasingly bigger installed base, more paid subscriptions and record revenue. That goes to show that the work Apple puts in has paid dividends.

Apple's Revenue Growth
Figure 2 – Apple’s Revenue Growth
Apple's Paid Subscriptions
Figure 3 – Apple’s Paid Subscriptions

Apple Card will let users save rewards in a high-yield Savings – Apple is building a Super App in the US

Per Apple today:

Apple today announced a new Savings account for Apple Card that will allow users to save their Daily Cash and grow their rewards in a high-yield Savings account from Goldman Sachs. In the coming months, Apple Card users will be able to open the new high-yield Savings account and have their Daily Cash automatically deposited into it — with no fees, no minimum deposits, and no minimum balance requirements. Soon, users can spend, send, and save Daily Cash directly from Wallet.

Apple Card users will be able to easily set up and manage Savings directly in their Apple Card in Wallet. Once users set up their Savings account, all future Daily Cash received will be automatically deposited into it, or they can choose to continue to have it added to an Apple Cash card in Wallet. Users can change their Daily Cash destination at any time.

To expand Savings even further, users can also deposit additional funds into their Savings account through a linked bank account, or from their Apple Cash balance. Users can also withdraw funds at any time by transferring them to a linked bank account or to their Apple Cash card, with no fees.

Apple’s savings account marks the second time Apple and Goldman Sachs tag team to launch a financial product (with Apple Pay Later, Goldman Sachs’ role will be less prominent). Apple will take care of the customer experience while the iconic bank will handle the banking side. It makes perfect sense. Who is better than Apple in crafting a great user experience on devices that they manufacture? Apple also does not have any appetite in becoming a bank. Speaking from personal experience, I can tell you that while it’s great for consumers that banking is highly regulated, such regulatory oversight and scrutiny constitute a great deal of overhead for banks.

From Goldman Sachs’ perspective, they have ambition in growing their retail banking business. First, it’s Apple Card. Then, they got the GM portfolio and are said to be launching a T-Mobile credit card soon. Goldman Sachs has the drive and tools to handle the complex and cumbersome banking regulations. However, legendary as an investment bank as Goldman Sachs is, it will have to spend a lot of money on creating a consumer-friendly image as well as on acquiring customers.

The race to book new checking and savings accounts becomes increasingly expensive. Chase rewards new qualified customers who open a new Savings account with $300. I have seen similar offers from other financial institutions. My guess is that Goldman Sachs will have to compensate Apple for every Savings account opened through the Wallet app. The freedom that Apple mandates on the product for their customers means that it will be much more difficult for Goldman Sachs to forecast the cash flow and deposits. On the other hand, whoever opens this Savings account is less likely to close any time soon and Goldman Sachs won’t have to deal with gamers (who signs up to something just for the bonus and then leaves). If there are 10 million Apple Card users in the US, Goldman Sachs could potentially sign up thousands of Savings accounts in no time, due to this partnership.

From a consumer perspective, what are the benefits? Goldman Sachs already has a Savings product with 2.35% APY. I think this new Apple’s Savings account will have a similar yield. More importantly, it is the convenience and customer experience that will be the deciding factor. Instead of going through a bank’s complex application process, users can sign up for an Apple’s Savings account on their phone. Additionally, users can move money in and out of the account seamlessly at any time and instantly. With incumbent banks, it will take several days. We should not underestimate the impact that instant gratification has on user satisfaction.

Apple is building a Super App in the US?

Here is what Apple is currently offering:

  • Hardware: excluding very old models, AirPods and other headsets, all other Apple devices in the wild are capable of conducting transactions. And there are A LOT of them in the US. Whether it’s in stores or online, consumers can use their devices to make or receive a transaction
  • Wallet App/Apple ID: most Apple users use one Apple ID and all information is automatically updated and synchronized across devices, provided that they are connected to Internet. In other words, transactions and rewards earned from the physical Apple Card or a Macbook will show up on an iPhone without any action from a user
  • Apple Pay: arguably the most popular checkout option at counter and online on the market
  • Apple Card: an Apple-branded credit card that offers 2% cash back on everything with Apple Pay as well as 3% at Apple and a few other retailers. Users can also put their Apple purchases on installments with Apple Card. Rewards from Apple Card will be automatically turned to cash in Apple Cash that can be redeemed any time
  • Apple Pay Later: a new yet-to-launch BNPL service that will allow users to break a service into 4 installments with no interest or fees
  • Apple Cash: a service that enables Apple users to send money to and receive money from other people. Like a digital checking account
  • Apple Tap To Pay: this feature allows merchants to turn their iPhones into a payment terminal. A consumer and a merchant only need to put their iPhones close to one another and boom, the transaction is done
  • Order tracking in Wallet: starting with iOS16, Apple users can track their orders right from the Wallet app

In Super Apps, I wrote:

The term Super Apps is generally credited to Mike Lazaridi, the founder of Blackberry, who defined it as “a closed ecosystem of many apps that people would use every day because they offer such a seamless, integrated, contextualized and efficient experience”. In laymen’s terms, a Super App is an application that offers various services on one interface. While the mix of services offered by Super Apps varies from one to another, the common denominators of these apps are 1/ they are all two-sided networks popular with both merchants and consumers and 2/ they all began their journey by being excellent in one function before branching out to others. 

It all started with Apple Pay in 2014. After almost 10 years, Apple Pay is accepted at many merchants in the country and around the world. It’s in the hands of millions of consumers who own Apple devices. Now, other pieces are in place to make Wallet and Apple devices something that consumers will use every day in “a seamless, integrated, contextualized and efficient experience”. I don’t know if the Apple executive team already had this vision a decade ago, but if they did, kudos for patience, long-term vision and execution.

Take-aways From CFPB’s Report On Buy Now Pay Later

CFPB just released a report on Buy Now Pay Later (BNPL) which I think is pretty comprehensive. The report covers a lot of ground using data between 2019 and 2021 from five surveyed lenders. If you are interested in consumer financial products or BNPL in particular, you should have a read. Below are some of my takeways

BNPL grew furiously in 2020 and 2021

According to the report, the number of loan originations from BNPL lenders in the US grew by 227% per year, from almost 17 million in 2019 to 180 million in 2021. The amount of BNPL loans grew even faster, by 245% per year, from $2 billion in 2019 to $24.2 billion in 2021. In the same period, the average loan size increased from $121 to $135. I suspect that this is due to the popularity of Peloton in 2020 and early 2021 at the height of Covid and the urge to go back to travel late 2021. The growth in average loan size is exactly what the lenders will sell to merchants: come to us, pay us the merchant fees and we will bring you more business.

BNPL Loan Origination Volume
BNPL Loan Volume By Merchant Vertical

BNPL usage rate and the number of BNPL super fans continuously rose


The quarterly usage rate has steadily increased over the past three years, reaching a high of 2.8 loans per unique borrower in Q4 ’21. In Q4 ’21, four of the five lenders surveyed had a usage rate between 2.9 and 3.2 per quarter, while the fifth had a usage rate below 2

In short, the last three years saw an increase in quarterly usage to about one loan per month per average user. This increase was slower than that seen in the upper ends of the spectrum. Specifically, the share of users with at least 5 or 10 loans per quarter reached 15.5% and 4% at the end of 2021 respectively. It’s quite surprising yet interesting to me that 4% of BNPL users used the product more than 3 times a month. I am suspecting that these high-usage users concentrate more in the young generations. With BNPL, users must be underwritten on a transaction basis. The fact that some ignore the inconvenience of filling an application 3 times a month instead of getting a credit card indicates that they cannot get a credit card. On the other hand, a debit card is always available, even to these thin-file consumers. Hence, it is a little worrying to see this kind of behavior, when there is a debt-free alternative out there.

Share of Unique Quarterly BNPL Borrowers With 5+ and 10+ Loans

Young consumers like BNPL and they tend to default

The surveyed lenders’ demographics data backs up my suspicion above over the credit-trapped young consumers. BNPL skews heavily towards younger generations. Even though we see more older and presumably wealthier consumers over 40 years of age, almost 50% of BNPL users are 33 years old or younger. Compared to the 2020 Census Bureau data, these young consumers are over-indexed.

Worryingly, it is consumers aged 33 or younger where we found default or charge-off most frequently. According to the surveyed lenders, 5.7% of BNPL users aged 18-24 had at least one default or charge-off in 2021 while 4.8% of users aged 25-33 had a derogatory BNPL trade. No other age group had higher than 4%. These data points show that any credit issuer wanting to underwrite thin-file consumers need to do their homework carefully in order to manage risks. This population is too big and valuable to ignore, but they are very risky!

Share Of Unique Borrowers By Age Cohort With 1+ Default Or Charge-Off

One in ten borrowers was charged a late fee in 2021

We can deduce the amount of overextension from borrowers by looking at late fees. According to the report, the borrower-level late fee rate in 2021 was 10.5%. That’s surprisingly high to me given that all BNPL lenders enforce autopay and Affirm doesn’t charge late fees. Because autopay is virtually required on every loan and 89% of all payments in 2021 came from debit cards or checking accounts, the fact that one in ten borrowers got penalized shows that many users didn’t have sufficient funds for their purchases in the first place.

BNPL Late Fees

Decoupling – A Great Tool To Analyze Business Strategies & Disruption

What is Decoupling? In an insightful working paper, Thales Teixeira and Peter Jamieson described Decoupling as “the separation of two or more activities ordinarily done in conjunction by consumers”. The separation’s purpose is to increase value for consumers by focusing on the value-creating activity while reducing exposure to the value-capturing or value-destroying one.

Breaking down a business’ success or failure is not a straightforward exercise. There are so many factors at play. The same goes for disruption. However, I believe Decoupling offers a simply yet powerful tool to analyze business strategies and disruption.

Below are a few examples of how I use Decoupling to look at companies:

  • Uber: consumers have a transportation need to go from A to B. That’s the value-creating piece. However, before Uber, there were several non-value-creating activities. If someone wanted to drive themselves, they had to physically and mentally stay alert for some time and look for a parking slot. If riders used a taxi, they had to somehow manage to get a cab and in some cases, suffer from an unhygienic car/driver. Uber decoupled the act of going from A to B in a comfortable manner from all other noises by providing consumers a way to book a decent car with just a few taps on a phone and a driver that is already vetted.
  • Aldi: at grocery stores, consumers want to buy groceries that they deem worth their money & time. That’s the value consumers need. Some stores; however, sell many more items, stack different variations for one item (cereal, milk or ground coffee, for example) and, as a consequence, have bigger stores that take time for consumers to navigate. Aldi competes and, dare I say, wins over consumers by focusing on selling good groceries on the cheap by 1/ leveraging private labels which are cheaper than national brands; 2/ eliminating activities like market research, advertising or unnecessary expenses; 3/ keeping their stores small and just acceptably decorated. They decouple affordable groceries from everything that threatens to increase costs.
  • Venmo/CashApp/PayPal: Consumers always need to send money to and receive money from other folks as quickly, cheaply and seamlessly as possible. Before the likes of Venmo, CashApp or PayPal, it was either cash on hand which necessitated an actual time-consuming meet or a check which took some time to settle. These apps decoupled the money exchange activity from the time wasters. Consumers can exchange money in almost real time.
  • AWS: every company needs IT infrastructure to operate and compete in this day and age. What they don’t need is to go out, scrap all the components, stand up an IT stack and maintain it over time, including hardware replacement and software update. AWS decouples the use of IT resources from the act of acquiring and maintaining it. Because of AWS, startups can get going quickly without saddling themselves in high expenses while big companies can leverage the cloud and scale down IT workforce.
  • AirBnb: ordinary hosts that don’t operate a resort or hotel have three essential activities: hosting, finding guests and verifying that such guests are trustworthy enough to let into their homes. Guests, on the other hand, have to travel and find a place where they can feel safe. AirBnb functions as the decoupler that allows hosts to focus on hosting and guests to focus on traveling. The brand name of AirBnb and the network effect bring one party to the other. Their review mechanism fosters the trust in the ecosystem.
  • TSMC: the production of computer chips involves design, manufacturing and assembly of chips. Each step requires different expertise and cost structure. Semiconductor shops in the past used to do everything. Then, companies like TSMC decoupled from the value chain. The Taiwan-based firm focuses on building the best fabs in the world and manufacturing chips, leaving the design and assembly to somebody else. The result is that TSMC is now the market leader in the chip manufacturing market and the indispensable player in this industry.

Decoupling works because it reduces costs for both the decouplers and consumers. From the consumer perspective, the more activities, the more costs. And I am not merely talking about monetary costs. Time spent on non-creating activities is also a significant cost. From the decoupler perspective, focusing on one link in the value chain deepens expertise, reaches economies of scale and lowers unit economics. Aldi is still one of the most affordable and best grocers out there. Remember when Uber and AirBnb used to be cheap when they had their breakthrough?

Decoupling, in my opinion, is a useful concept and powerful tool to look at businesses. Thales’ book will have more details. If you are interested in learning more, I’d recommend that you read it.

The push to grow the…mind-twistingly complex Bundles by Disney

Disney recently announced a slate of price increases for their products: Disney+, ESPN+ and Hulu. Specifically, Disney+ will cost $10.99/month starting this December, up from $7.99. Next month October 2022, Hulu subscribers will pay $7.99 and $14.99 for the ads-supported and premium plans, up from $6.99 and $12.99 respectively. Meanwhile, ESPN+ users already saw the largest increase (percentage wise) as plans that used to cost $6.99 are now worth $9.99.

In addition, there will be a new ads-supported plan for Disney+ in December 2022 which will cost the same as the old premium Disney+ ($7.99). Due to all of the upgrades and additions, Disney also updates their bundles and it’s…unnecessarily complicated. Here is what it looks like

There are a couple of things worth discussing from this recent update from the iconic company. A couple of years ago, Disney set an ambitious goal in subscriber count and profitability for Disney+, as follows:

  • Disney+: 230 – 260 million subscribers with Disney+ Hotstar making up 30-40% of the base and profitability by FY2024
  • Hulu: 50 – 60 million subscribers by FY2024 and profitability by FY2023
  • ESPN+: 20 – 30 million subscribers by FY2024 and profitability by FY2023

Here is where the company was as of the end of the last reported quarter (Q3 FY2022):

  • Disney+: 152 million subscribers with Hotstar making up 38%. The service added less than 10 million new subscribers per quarter
  • Hulu: 46.2 million subscribers, adding less than 1 million new subscribers every quarter
  • ESPN+: 22.8 million subscribers

As the numbers show, ESPN+ is the only service that looks like it’s going to deliver as promised. There is no guarantee that the subscriber count will stay at this level in 2 years, but ESPN+ does earn the benefit of the doubt. Unfortunately for Disney, the other services are likely going to miss the subscriber target at this pace, given the intense competition and churn. And that is why Disney is pushing HARD on bundles at the moment.

First, the above graphic shows how aggressively Disney sells bundles at discount. Second, the emphasis on the Disney Bundle is all over their digital properties. Go to any of the three services’ websites and you will be hit in the face with the call to get the Bundle. The reason behind such aggressiveness in Marketing is that Disney counts every Bundle subscriber as a paid subscriber to each of the service included in the Bundle. In layman’s terms, if you subscribe to a bundle featuring all three services, you are counted as a paid subscriber in all three. That’s why Disney is so invested in pushing their Bundles, because they are running out of time to meet the subscriber goal for Hulu and Disney+.

It is not lost on me that a bundle is a great way to keep churn low. Subscribers that use all three platforms are more inclined to stick around than those that only pay for one. Plus, the prices of the Bundles are very competitive. HBO Without Ads costs $14.99/month while Netflix Premium, the only plan with 4K on Netflix, stands at $19.99/month. Compared to these alternatives, Disney Bundle 4 above looks pretty attractive, especially if you are a family with different interests.

Even though I see the rationale behind their Marketing push of the Bundles, I have a couple of concerns. First, I do expect more ambiguity regarding Disney’s reported numbers. Like, if someone subscribes to a bundle with all three services, how is Disney going to slice and dice the revenue among them and what would be the impact on each service’s Average Revenue Per User and profitability? How much of ARPU and profitability comes from advertising revenue? Would Disney disclose the role of Bundles next year and beyond? We won’t get that much clarity and we will have to trust Disney on whatever they elect to disclose, but if you are an equity analyst, good luck with your forecast!

Second, the number of individual and Bundle plans is really dizzying and unnecessarily complex. Just look at how many plans consumers have to look, analyze and ultimately choose. Choice overload can be a real issue here. I wonder why Disney feels the need to keep Bundle #3 and #6 on the graphic above. To make matters worse, the company currently has an intro offer that artificially lowers the price of some plans, mostly Bundles, in the next three months before the real levels take effect. That’s just too much complexity for consumers and if they complain about being tricked into paying more, I do see why that can be the case.

Can an unsuspecting casual viewer know easily that this plan has ads on Hulu and prices will increase to $75/month soon?

Personally, I’d love for Disney to display all the individual plans’ prices on their websites so that consumers can do the maths and calculate the savings themselves. Right now, consumers have to go to three separate websites or an Investor Relation page to see how much they would have to pay for Disney+, ESPN+ and Hulu individually. That’s not customer-friendly at all!